TMFDeej (97.73)

And the new mystery stock is...

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For a week or two now I have been alluding to a mystery stock that I have established an initial position in. Some have tried to guess it, but to be honest with you it's so obscure that I'm not surprised that no one got it. It's actually pretty finny, I haven't established a massive position in this one yet because I'm still researching it, but so far it seems like it was almost like it was tailor-made for me. I'm not saying that it's the perfect stock, but it has all of the attributes that I personally love, a special situation REIT conversion with catalysts and a big dividend that seems to be out of favor at the moment because of a temporary situation...I laughed, I cried, it was better than Cats.

This new stock is actually everything that another company that I sniffed around for a while, Power REIT (PW) should be, but isn't (that's another interesting one, but for another day).

The new company that I have been buying is... CorEnergy Infrastructure Trust (CORR).

CORR was formerly a closed-end fund (I've also seen it called a BDC, it doesn't really matter much at this point because it is not one any longer) called Tortoise Capital Resources (TTO). I actually remember when the company initially went public several years ago. As a yield hound, it popped up on my radar, but I decided to pass at the time.

A little while ago it decided to shift gears away from owning securities in things like MLPs and REITs to actually providing funding to companies in the sector through sale / leaseback agreements. It is attempting to become a brand-new type of REIT (pending) that is being created to own energy infrastructure. Heck, if casinos and prisons can become REITs then companies in energy infrastructure should be allowed to. Anyhow, Mr. Market absolutely hammered CORR when it announced a secondary stock offering to fund its first major acquisition in the sector.

Normally I might be a little skeptical of relatively small a company that I had never really heard much about that claims to be transforming into something brand new like this, but it really is...it bought a liquid gathering system from our a company that I know well, Ultra Petroleum (UPL). That's a legitimate purchase. It then leased back the system to UPL for fifteen years. This isn't my favorite type of infrastructure asset because there can be some volatility with its revenue, but CORR was able to iron out a lot of that volatility by negotiating a guaranteed minimum of a $20 million annual payment for its use. Alas, the high-end is capped as well at $27.5mm. There is an adjustment for inflation in the cause as well. This translates to a cap-rate of 8.89% to 12.22%, which is pretty darn good in the current low rate environment.

Once cash begins flowing in from this investment, CORR plans to raise its dividend to $0.50/share, which would result in a yield of over 8% at today's share price. Also, after the acquisition of UPL's assets is complete, it appears as though CORR will be trading for over a dollar less than the sum of the value of its assets, including the Ultra collection system and its legacy assets. I suspect that this discount will shrink significantly once REIT status is approved and the lease-back cash flow begins to come in.

One concern about this investment is that CORR has external management. One always likes to see ownership of a company that has a lot of skin in the game so to speak. However, to me this concern is eased somewhat by the fact that Corridor InfraTrust Management, the new entity that was formed to manage CORR, is incentivised to increase the stock's dividend. I have done some research on the operators of Corridor InfraTrust Management and they seem to have a decent amount of experience in the energy infrastructure sector.

Another risk is that CORR is technically not a REIT yet, but it is in the process of converting into one. Should this conversion not be approved for some reason, that would obviously be a bad thing, but to me it seems reasonably likely that it will succeed. The company that is managing CORR is taking all of the necessary steps to qualify as a REIT. Furthermore, if private prisons and casinos are converting into REITs, I personally don't see why something that's as important as energy infrastructure wouldn't be allowed to.

I view this is an interesting opportunity to get in at the beginning of a REIT that is undervalued today and has the potential to grow significantly in the future.

So I was wondering why UPL is doing this transaction with a pretty high cap rate. I see that they reported gigantic non-cash losses the past two quarters and continue to be FCF negative. UPL's capital position is a potential problem for CORR I guess - need to look at the terms of their debt to be sure they are built to last 15 years.

Hey Mega. HA. I threw it on the scorecard without writing anything about it until I was allowed. I think that still abides by the trading rules.

Under the radar stocks like this are where some serious returns can be made, but they're also more work to research. If either of you do end up doing additional research on this one, please let me know what you find out. The more the merrier with an obscure stock like this one.

Hey Dan. My favorite right now is someone who's relatively new to posting there, Chris Demouth Jr. I believe that's how it's spelled. He's a special situation machine. He acctually blogs quite a bit up there. It's fascinating stuff. Other than that, I usually just look at the headlines that are e-mailed to me and click on the ones that I find interesting...when I have the time.